Wednesday, May 18, 2022

How First-Time Borrowers With No Credit Score Can Get A Loan

The use of technology allows collecting alternate data such as cash flows, financial etiquette, utility bill payment history, investments, spending behaviour, etc., of first-time borrowers to build a credit profile that can be used for underwriting.

How First-Time Borrowers With No Credit Score Can Get A Loan

There can be several instances when a loan comes in handy. Typically, credit scores are used as an important determinant in the traditional process of granting loans. However, if you are just starting with your first line of credit, it can be challenging to have a good credit score available that bank officials can verify to sanction your loan. As a result, many first-time borrowers, also known as new to credit (NTC) customers, find it excruciatingly painstaking to complete their loan application process.  

Much to the relief of NTC customers, the rise in technology and the use of alternate data in the underwriting process has made traditional lending practices obsolete. Understanding the creditworthiness of an applicant has turned out to be more than just their credit score. Alternate data has opened gates for many individuals by considering factors such as cash flows, financial etiquette, utility bill payment history, investments, spending behaviour, etc., to provide a holistic understanding of a customer’s creditworthiness. 

There has been a rise in India’s affluent middle class as well as immense growth in the rural economy. This trend has primarily been supported by the increased spending and costs that continue to alter the consumption boom in India. Moreover, rapid technological adoption has also created a field of increased acceptance for new financial tools thereby allowing India’s credit market to evolve into a self-sustaining and self-generating market. Between March 2000 and March 2021, the average growth rate of domestic credit in India has increased by 15.1 per cent. This growth was primarily driven by retail loans and the increasing use and penetration of credit cards. Out of this, nearly 92 per cent of credit cardholders in India demonstrate good and timely repayment habits.  

Challenges For People Without Credit Score 

During the traditional lending process, data such as credit dues, credit score, unpaid debt, debt repayment habits, other loans, and repayment history are considered to evaluate the creditworthiness of an individual. While this method can be useful for applicants who have enough data with respect to their credit and credit habits, it can be challenging to employ this method to gauge the credit-repayment ability of individuals without any past credit data. Moreover, applicants without a credit score may also face a great level of resistance while applying for loans as traditional loan approval processes don’t comply well with a lack of credit data.  

Other Aspects That Matter 

While credit scores of applicants are typically considered, it is not all that matters. With improved access to several other data points and technological advancements to generate meaningful insights from this data, credit scores are no longer mandatory to estimate the creditworthiness of an individual. For customers who don’t have a reliable dataset of their credit history and habits, alternative data such as Account Aggregator (AA) data, financial etiquette, payment history of utilities and bills, debt repayment patterns, consumption patterns, and others can be helpful.  

How Can Alternative Data Help? 

Utilizing alternative data is considered one of the best approaches to be adopted by financial institutions and banks to make data-backed informed lending decisions and get a complete understanding of their customer’s ability and willingness to uphold credit commitments. One of the key benefits derived from alternative data is that it provides greater insights into the financial management habits of the individual across several areas apart from mere debt repayment habits. This can help lenders go through the profiling process in a better and more efficient way and gain more understanding of the creditworthiness of the applicant. Using alternative data also helps customers gain more access to credit and loans as it removes the barrier of the requirement for a credit score. 

A Step Ahead With Alternative Data 

Alternative data can open doors with respect to exposure. Lenders can gain access to a more comprehensive understanding of the credit risk associated with the consumer. This can be beneficial and helpful during the process of providing credit to consumers after verification of their credit profile. Ultimately, alternative data helps increase lenders’ confidence when it comes to providing credit to consumers who do not have credit scores.  

The author is CEO and Co-founder of, the parent company of Algo360. 

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.